Eagle Ford blues

Mood turns black as oil as boom turns to bust

Story by Jennifer Hiller | Photos by Jerry Lara

COTULLA — This is one place where the oil boom ends, at the locked glass entry of a brand-new hotel.

There are a lot of them.

The bust in crude oil prices, down from $107 in June 2014 to around $38 on Friday, has given consumers the cheapest gasoline prices in years, but created a financial storm in distant places knitted together by oil, a complex global economic tapestry.

Things are unraveling in the oil fields of Oklahoma, which slashed its entire state budget 7 percent, and in the boardrooms of North American energy companies, 48 of which have gone bankrupt so far, according to Haynes & Boone LLP. Oil-dependent Venezuela devalued its currency and may raise the price of staple foods such as rice.

Even some leaders in the Middle East have questioned the entire point of their once-mighty oil cartel, whose existence was supposed to keep oil prices from crashing through the floor.

In South Texas, where the 400-mile-long Eagle Ford Shale formation pumps 1.2 million barrels of oil per day, Malana Hotels & Suites owner Bob Zachariah just closed the new hotel in Cotulla and put it up for auction. It had opened last January with a sleek design and amenities such as iPad stations in the lobby and a lap pool.

“We had to stop the bleeding,” Zachariah said. “We decided enough was enough.”

He isn’t the only one humbled by the most-recent bust. Blocks from the hotel at other businesses, dandelion and Indian blanket wildflowers tangle their roots into the gravel of empty RV slots. At a group of trailers known as a “man camp,” weeds creep across the porches of shuttered cabins, where rotating crew members once cycled through and set their dusty boots at the end of a shift.

In Kenedy, 48-year-old Albert Arnold had worked his way up from roustabout to field supervisor. But he lost his $80,000 per year job with that employer, and a series of others with companies that have gone bankrupt. His marriage ended under financial strain when his wife also lost her oil field job, and Arnold spent four months last winter living in his 1997 Ford Explorer with his Rottweiler. He would park at a friend’s house, use an extension cord, fold down the seats and inflate an air mattress.

“Once the oil field gets in your blood it never gets out. When it goes away, you try and try and try to find something else,” said Arnold, who has been through busts before. “It cost me my marriage and everything.”

Last year, he earned $17,000 cobbling together short-term jobs doing everything from cleaning frac tanks to washing drilling rigs. He hopes to get his commercial driver’s license soon. He and his ex also have reunited, giving him a place to live. “I do yards, trim trees. I work on people’s cars,” Arnold said. “Stuff I was blessed to learn throughout my life. It’s keeping me alive now.”

The data show an industry crisis spiraling down to workers and communities.

While the world market is awash in an extra 1 million barrels per day of oil - the reason for the price crash - another 40,000 industry workers in Texas face possible layoffs this year. Some 72,000 oil workers already lost their jobs last year, according to the Texas Alliance of Energy Producers’ economist.

Tax revenues plummet

The once-celebratory boom has turned so funereal that people are even drinking less — at least in public. Bars and restaurants are selling less beer, wine and spirits in most places in South and West Texas, where the Eagle Ford and the Permian Basin are the state’s biggest oil fields.

In Ector County, where Odessa is one of the Permian Basin’s biggest cities, alcohol sales in February were down nearly $70,000, off 25 percent from the prior year, according to state data.

Hotel revenues have plunged by 40 percent to 70 percent in oil field communities in the Eagle Ford and Permian Basin, according to the Texas Comptroller of Public Accounts.

Sales taxes, which help fund city and county budgets, are down 20 to 50 percent in most oil field towns.

In Dimmit County in the Eagle Ford Shale, just three rigs are drilling for oil, down from 18 last year.

Across the state, the number of active rigs has dropped by 637 since the start of 2015 to 215 now, an ominous jobs indicator for Texas. Each drilling rig has more than 100 jobs attached to it, everyone from floor hands to office workers.

Sales tax revenue dropped 66 percent in Dimmit County to $380,000 during the first two months of the year, from more than $1.1 million in the same period last year.

“It’s like it was five years ago. We’re just going back in time,” said Peggy Schulze Van Cleve, who owns the ranch store, Peggy’s Circle V in Carrizo Springs, the Dimmit County seat. “There’s still some trucks hauling water and oil. We have a lot of construction going on at the county that I don’t know how we’re going to pay for. The motels are empty. You don’t have to wait for the traffic. You can go into a restaurant and get served real fast.”

It’s a big change for a place whipsawed from sleepy to boom town and back again.

Two years ago, white fleet pickups jammed restaurant parking lots and the amount of activity in the Eagle Ford shocked anyone who knew anything about the poor region, or the oil business.

Texas oil had been in a death spiral since the early 1970s. Production turned around in 2009 when companies figured out they could unlock oil trapped in shale with a new combination of technologies — horizontal drilling with hydraulic fracturing, which pumps millions of gallons of water, chemicals and sand at high pressure to break the rock and prop open the cracks, releasing oil and gas.

Fracking, all of a sudden, opened up more than 13 billion new barrels of oil reserves drillers previously couldn’t extract. Early shale wells cost $10 million or more to drill and frack, but oil prices were soaring. It was an expensive process, but generally profitable so long as U.S. oil prices stayed above $80 to $100 or so a barrel in those early days. It seemed like easy money. Wall Street scrambled to extend credit to the industry, which got faster and better at extracting the oil, and eventually cut well costs in half.

An army of drilling rigs and frack fleets — hulking pieces of strange equipment — started traversing state highways and dirt county roads. Newly arrived workers might have found themselves with a job but no place to sleep in a rural region. Hotels in South and West Texas charged as much as they wanted and filled every room, sometimes in contracts that booked a place for years at a time.

The oil companies had no trouble paying. Oil prices were depressed by the U.S. financial crisis in 2008, but had rebounded with gusto. U.S. crude surged 34.7 percent in 2009 to end the year at $79.36 a barrel. Prices jumped another 12 percent the following year, then rose 7.5 percent more in 2011 to $98.83 a barrel. Driven by demand from booming economies in developing countries such as China, oil would trade at around $100 a barrel to its peak in mid-2014.

In five years, U.S. producers added 5 million additional barrels of oil per day.

Nearly all of it came from three shale fields: the Bakken in North Dakota, the Eagle Ford in South Texas and the Permian Basin in West Texas and eastern New Mexico — reaching daily production of more than 9.3 million barrels last November, which approaches the U.S. peak production of the early 1970s.

The Saudis

Years of stable, high oil prices drove the activity through the summer of 2014 when prices started to soften. The first roller coaster drop came in November that year, after the Organization of the Petroleum Exporting Countries, a cartel of 12 countries led by Saudi Arabia that produce 40 percent of the world’s oil and 60 percent of what’s traded internationally, refused to cut production to prop up worldwide oil prices.

Prices have plunged by more than 64 percent since then to $38.46 on Friday. They were down by as much as 74 percent to a 13-year low of about $28 a barrel in late January, but have seesawed in recent weeks amid speculation that some of OPEC’s members would at least freeze production at January levels.

Last month at an international oil and gas conference in Houston, Saudi Arabia’s oil minister, Ali Al-Naimi, considered the most powerful man in the industry, said that OPEC still won’t consider cutting production. There’s no point, he said, since member countries don’t trust each other. A cut by one would only result in someone else grabbing market share, including U.S. shale producers, who are expected to jump right back in once oil is reliably above $50 a barrel.

“The producers of these high-cost barrels must find a way to lower their cost, borrow cash or liquidate. It sounds harsh, and unfortunately it is,” Al-Naimi told a crowd of about 2,800 at the IHS CERAWeek conference on Feb. 23. “It is the more efficient way to re-balance market.”

The room fell pin-drop quiet as energy executives, who understood the implications, absorbed the news. Oil prices plunged 4.6 percent that day to $31.87 per barrel, following Al-Naimi’s remarks. They’ve fluctuated in recent weeks as the Saudis and other OPEC countries flirt with a freeze in production, but not an all-out reduction.

“Let me say to Americans, we have not declared war on shale, or on production from any given company or country,” he said.

But everyone is injured, none more so than the U.S. oil industry.

The Paris-based International Energy Agency expects the U.S. to reduce shale output by 600,000 barrels a day this year, and another 200,000 barrels per day next year.

Several struggling OPEC countries have been clamoring for production cuts for more than a year, to no avail. Saudi Arabia,which produces 9.7 million barrels of oil daily, about 10 percent of global oil demand, is the only country with a real ability to raise or lower production as needed.

Allen Gilmer of the Austin-based research firm Drillinginfo recently wrote that production is falling in the U.S. as Iran, Russia and most of OPEC are starved for cash, “some to the point of existential crisis.”

Oil rich countries always do well when crude is trading high. But the plunge in prices over the last 21 months has unraveled state finances across several economies. Even Saudi Arabia is considering selling shares in its national oil company, Aramco, the world’s most valuable firm, to bolster state finances that have been depleted by the market rout.

In Venezuela, where oil revenue accounts for about 25 percent of the country’s gross domestic product, officials declared a state of economic emergency in January. President Nicolás Maduro raised gasoline prices more than 6,000 percent last month — the first price hike in 20 years.

OPEC members Saudi Arabia, Qatar and Venezuela, along with Russia, have agreed to “freeze” production at January levels if other nations would do the same.

Few people think a freeze would hold, or that it would accomplish much if it did.

In a world where an unwanted 1.2 million barrels of oil is for sale every day, U.S. Energy Secretary Ernest Moniz expressed doubt. “I’m not sure what a freeze means in any case at a level that is oversupplying the market,” Moniz said in Houston.

But it’s the U.S. that is the main instigator in this price drama — the country where shale producers turned out to be so good at their job that they added millions of barrels per day of new production, said Karr Ingham, an oil and gas economist. The Eagle Ford alone was one of the fastest fields ever to hit the billion-barrel production mark, according to research firm Wood Mackenzie. Only the Alaska North Slope and Saudi Arabia’s Ghawar field have hit 1 billion barrels faster. Production is still rising in the Permian Basin, which pumps around 2 million daily barrels.

“I use this term tongue in cheek, but we’re the chief offender. The U.S. and North America and Texas are the chief offenders in changing the global supply scenario,” Ingham said. “Had it not been for the dramatic supply change from us, we wouldn’t find ourselves in this predicament.”

More layoffs

While drama plays out in the world oil market, Ingham expects tens of thousands of additional job losses in Texas this year.

“I don’t want this to be the case, but I know this to be the case,” Ingham said. “Industry activity at current levels will not support the number of people who appear to be on industry payrolls. It’s a scary proposition, but I suppose we need to speak the truth.”

Around 306,000 people worked in the industry in Texas in December 2014. That number is projected to drop to around 194,000 by the end of this year, said Ingham, who tracks an index for the Texas Alliance of Energy Producers.

“They’re laying off people, forcing people into retirement,” said Tom Wood Jr. of Houston, who was laid off from a small geoseismic company Jan. 11, but recently landed another industry job.

Debbie Lawrence, who owns Pinnacle Seismic in Midland, which processes and analyzes geoseismic data, said it breaks her heart each time she gets a résumé. “It’s bad. It’s real bad,” Lawrence said. “You worry yourself sick. I’ve laid off a lot of people. I gave up a lot of offices space and consolidated a bunch of stuff. You just lose sleep worrying.”

Pinnacle Seismic has some work still, but not much. Lawrence started the company 19 years ago and has worked in the business 35 years. This is the worst she has seen it. “So many of my clients I’ve worked with over the years have zero budget,” Lawrence said. “It’s not a matter of being the low bidder or anything like that. There’s no business to even fight over.”

The mood at the corporate level has turned black as oil, too. While executives spent much of 2015 talking about a possible price rebound by the year’s end, in 2016, people are making comparisons to the 1980s oil bust, a ruinous period that wiped out the real estate market and banking industries in Texas.

Scott Sheffield, chairman and CEO of Pioneer Natural Resources, was one of several executives at CERAWeek talking about the enormous debt held by many companies, and the unwillingness of banks to keep lending to energy firms.

“This is the worst I’ve seen it from a balance sheet standpoint,” said Sheffield.

Mark Papa of Riverstone Holdings, the former CEO of shale pioneer EOG Resources, said at the conference he expects 2016 will see “companies and bodies all over the place.”

Devon Energy Corp. President and CEO David Hager spoke on a panel with Sheffield in Houston. Both said that oil between $45 and $50 a barrel would nudge shale companies into drilling in some regions again, but that growing shale production again would take $60- to $70-a-barrel oil.

For now, companies are idling drilling rigs in Texas, folding them up and sending them to sit in farm fields, a growing mechanical graveyard. Three-quarters of the state’s 852 drilling rigs that were active in early 2015 have been mothballed so far.

Some of the biggest companies operating in the Eagle Ford — firms that collectively hold more than a million acres in the region — have pulled their rigs out of South Texas entirely.

Devon had no rigs running in the Eagle Ford by the end of December. Chesapeake Energy had three rigs working its 500,000 acres at the end of 2015 — and it expects to have zero by June.

A few weeks ago, Anadarko Petroleum Co. became the latest to announce it won’t drill in the Eagle Ford, where it holds 388,000 acres. The Houston driller slashed its budget 70 percent and laid off 1,000 employees, about 17 percent of its workforce, last week.

Sheffield said Pioneer, too, would stop drilling in South Texas, which isn’t as profitable for it as the Permian Basin. “A lot of people are dropping Eagle Ford rigs,” he said. “It will probably go down to 25 rigs. It started at 200 rigs.”

Hanging on

Some businesses that are still open are clinging to the edge of a cliff.

“The oil business has just dried up. It’s brought us to our knees,” said Jeff Myers, who owns a ranch north of Carrizo Springs, where he added cabins, RV slots, a pool and a restaurant on the advice of an industry friend in 2009. The restaurant has closed. The Double C Resort is at 10 percent occupancy and has a skeleton crew.

“It was a fun game to be in in 2012 and 2013,” Myer said. “It ain’t much fun now.”

At the Grand Eagle Ford Lodge in Tilden, owner Zia Ali and her husband are paying out of pocket to keep their 80-cabin property operating for now.

“Horrible. It’s been horrible,” Ali said.

In Cotulla, Zachariah’s Malana hotel costs about $1 million a year to operate, covering the mortgage, employees and utilities.

Rooms that fetched $89 to $120 a night when it opened last January more recently commanded $49, if Zachariah was lucky. The drop in hotel rates has matched the drop in the price of a barrel of oil, and hotel and lodge owners across the region say people are asking for, and getting, rooms at $30 to $40 a night.

“It’s a geopolitical play that Texas got caught in. What can mere mortals like us do?” Zachariah asked.